There’s One Important Metric Missing in The Annual Report

The annual report is a state-of-the-company document used by most public companies to disclose corporate information to their shareholders. Many publically traded companies invest a lot of thought and effort into this publication, which essentially summarizes key financial data, results of operations, market segment information, new product plans, key activities, and research and development activities. As the Annual Report evolved, it even started to include Corporate Responsibility activities such as sustainability. In fact, 95% of the 250 largest companies in the world now report on their corporate responsibility activities in their annual report, which is great!

There are however, some crucial insights to a company’s performance that are blatantly missing from the annual report. If you believe that an organization’s ability to execute is the sum of the people and their efforts within the organization, why are so few organizations publicly disclosing their employee engagement scores?

Many studies and surveys show that employee engagement is a leading indicator of company growth. Gallup’s research indicates that companies in the top 25% of their engagement database have considerably higher productivity and profitability ratings, for example, combined with less turnover and absenteeism. According to Gallup, organizations with an average of 9.3 engaged employees for every actively disengaged employee in 2010-2011 experienced 147% higher earnings per share (EPS) compared with their competition in 2011-2012. In contrast, those with an average of 2.6 engaged employees for every actively disengaged employee experienced 2% lower EPS compared with their competition during that same time period.

Human Resources consultancy Aon Hewitt also ran an extensive analysis and found that each incremental percentage of employees who become engaged would result in an incremental 0.6% growth in sales. This means that for a $5 billion company with a gross margin of 55% and 15% operating margin, a 5% engagement increase would yield an incremental $102 million.

What about impact on stock prices? Alex Edmans from the Wharton School looked at the relationship between “best companies to work for in America” (Fortune magazine’s annual list) and long-run stock returns. He analyzed the movement of a value-weighted portfolio of these companies from 1984 to 2009 and found that it was outperforming industry benchmarks and saw annual stock market growth by two to three percentage points per year higher then peers.

If an engaged workforce makes good financial sense, why does a simple Google search yield so few companies who are publically disclosing their engagement scores? I did find a handful results for Phillips, United States Postal Service, Allianz, TD Bank and Clorox, but it really seems that although business leaders and CEOs often state employees are crucial to their success, there has been little effort to disclose this link. With the absence of mandatory requirements for companies to disclose engagement data, one can’t help it but wonder why are companies so reluctant to take the lead on this matter?

Whether you’re an investor, an employee or a prospective employee, a full picture of employee engagement could gain you meaningful insight of a company’s overall health and better transparency to factors the internal climate (for example, do employees believe in the strategy?), the trustworthiness of leaders and the ability to execute on their strategy.

So what’s your take? Why are so few companies taking the lead on this topic?

1 Comment

Rouven, I think that annual report metrics will change to follow the societal impact of the last 30 years of technology. However, annual reports are designed to be “annual” and as a results their metrics need to be slow-changing.

The metric you mention is one, and customer focus is another. At Bluefin we always believed that the market would change so that our goal “To be the world’s most customer focussed consulting organization by 2025” would be measurable.